chapter 6. cost-volume-profit relationships

using the high-low method, the fixed cost is calculated _______________

after the variable cost per unit is calculated; using either the high or low level of activity

the contribution margin equals sales minus ________________

all variable costs

cvp analysis is based on some _______________ that may be violated in practice, but the tool is still generally useful

assumptions

contribution margin ration is equal to _______________ _______________ divided by _______________

contribution margin; sales

cvp stands for _______________ - _______________ - ________________

cost - volume - profit

cop analysis allows companies to easily identify the change in profit due to changes in _______________

costs; selling price; volume

the high-low method _______________

is based on periods where the activity tends to be unusual; uses only two data points

in the equation, y = a + bx, b represents the _______________

slope of the line; variable cost per unit of activity

the single point where the total revenue crosses the total expense line on the cvp graph indicates _____________

the break-even point; profit equals zero

the margin of safety is _______________

the excess of the budgeted (or actual) sales dollars over break-even sales dollars

if operating leverage is high, a small percentage increase in sales produces a _______________ percentage increase in net operating income than if operating leverage is low

higher

a company needs to sell 90,000 units to reach the target profit of $180,000. if each unit sells for $7.50, the total sales dollars needed to reach the target profit is _______________

90,000 x $7.50 = $675,000

the contribution margin statement is primarily used for _______________

internal decision making

the statistic R^2 _____________

is a measure of goodness of fit

the equation used to calculate the variable expense ration total values is total variable expenses divided by total _______________

sales

the relative proportions in which a company's products are sold is referred to as _______________ ______________

sales mix

when preparing a multi-product break-even analysis, the assumption is ordinarily made that the _______________ will not change

sales mix

when preparing a cvp graph, the horizontal axis represents _______________

sales volume

item order of contribution margin formal income statement

sales, variable expenses, contribution margin, fixed expenses, net operating income

when using the high-low method, the slope of the line equals the _______________ cost per unit of activity

variable

the break-even point can be affected by _______________

contribution margin per unit; total fixed costs; sales mix

paula's perfumes has a target profit of $4,000 per month. perfume sells for $15 per bottle and variable costs are $13.50 per bottle. fixed costs are $3,200 per month. the number of bottles that must be sold each month to earn the target profit is _______________

($4,000 + $3,200) / ($15 - $13.50) = 4,800

given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is _______________

($1,452,000 - $958,320) / $1,452,000 = 34%

a product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. if 10,000 units are sold, net operating income will be _______________

($10 - $6) x 10,000 - $35,000 = $5,000

softie, inc. produces facial tissues. the company's contribution margin ration is 77%. fixed expenses are $240,400. to achieve a target profit of $930,000, softies' sales rounded to the nearest dollar must be _______________

($240,400 + $930,000) / 0.77 = $1,520,000

solving for the sales level needed to attain a target profit of _______________ is the same process as solving for the sales level needed to break-even

$0

given a sales price of $100, variable costs of $70 and a break-even point of 500 units, net operating profit for sale of 501 units will be _______________

$100 - $70 = $30; for every unit above break-even, profit increases by the contribution margin per unit

gifts galore had sales revenue of $189,000. total contribution margin was $100,170 and total fixed expenses were $27,500. the contribution margin ratio was _______________

$100,170 / $189,000 = 53%

a company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. the variable cost per unit is $11 and the company desires a total profit of $4,500. the quoted selling price per unit for 500 units should be _______________

$11 + $4,500 / 500 = $20

cakes by jacki has $144,000 of fixed costs per year. the contribution margin ratio is 59%. the sales dollars to break-even rounded to the nearest dollar equals _______________

$144,000 / 0.59 = $244,068

blissful blankets' target profit is $520,000. each blanket has a contribution margin of $21. fixed costs are $320,000. the number of blankets blissful blankets needs to sell in order to achieve its target profit is _______________

($520,000 + $320,000) / $21 = 40,000

company a has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. company a has _______________

a contribution margin equal to fixed costs; reached the break-even point

in the formula: profit = unit cm x q - fixed expense, setting profit to zero can be used to calculate the ______________-_______________ point

break-even

the variable cost per unit using the high-low method is calculated as _______________

change in cost divided by change in units (activity)

when making a decision using incremental analysis consider the ______________

change in cost resulting specifically from the decision; change in sales dollars resulting specifically from the decision

when using the high-low method, if the high or low levels of cost do not match the high or low levels of activity _______________

choose the periods with the highest and lowest level of activity and their associated costs

a change is profits that occurs due to a change in sales and fixed expenses may be calculated as _______________

cm ration x change in sales - change in fixed expenses

after reaching the break-even point, a company's net operating income will increase by the _______________ _______________ per unit for each additional unit sold

contribution margin

to calculate the degree of operating leverage, divide _______________ _______________ by net operating income

contribution margin

users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the _______________ approach

contribution margin

a company with a high ratio of fixed costs _______________

is more likely to experience greater profits when sales are up than a company with mostly variable costs; is more likely to experience a loss when sales are down than a company with mostly variable costs

the degree of operating leverage _______________

is not a constant; decreases as sales and profits rise; is greatest at sales levels near the break-even point

what method(s) use all the available data points to divide a mixed cost into its fixed and variable components

least-squares regression

the profit graph allows users to easily identify ______________

the profit at any given sales volume; the sales volume required to reach the break-even point

the break-even point is reached when the contribution margin is equal to _______________

total fixed expenses

in least-squares regression line, the intercept of the line represents the total ______________ cost

fixed

contribution margin is first used to cover _______________ expenses. once the break-even point has been reached, contribution margin becomes _______________

fixed; profit

which statements regarding the high-low method are true: - the high-low method should only be used if a scattergraph plot indicates a linear relationship between cost and activity - when applying this method, use the data points with the highest and lowest level of cost - it is superior to least-squares regression - it only uses two data points

the high-low method should only be used is a scattergraph plot indicates a linear relationship between cost and activity; it only uses two data points

company a sells its product for $10 per unit. if company a has variable expenses of $5 per unit and fixed expenses of $200,000, the break-even point in units and dollars is ______________

$200,000 / 5 = 40,000 units; 40,000 x $10 = $400,000

adam's sports store has a contribution margin ratio of 55% and has already passed the break-even point for the year. if adam's generates additional sales of $250,000 by the end of the year, net operating income for the year will increase by ______________

$250,000 x 55% = $137,500

a company has a target profit of $204,000. the company's fixed costs are $305,000. the contribution margin per unit is $40. the break-even point in unit sales is ______________

$305,000 / $40 = 7,625

given sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000, the result is a _______________

$40,000 - $50,000 = $10,000 net operating loss

steel, inc. has a margin of safety in dollars of $559,740. if actual sales were $2,946,000, steel's margin of safety percentage is _______________

$559,740 / $2,946,000 = 19%

seating galore sells high-end desk chairs. the variable expense per chair is $85.05 and the chairs sell for $189 each. the variable expense ratio for seating galore's chairs is _______________

$85.05 / $189 = 45%

shonda's shoes sell for $95 per pair. if shonda must sell a total of 284 pairs of shoes to break-even, and a total of 450 pairs to achieve her target profit, sales dollars needed to earn the target profit equals ______________

$95 x 450 = $42,750

budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. the company's budgeted margin of safety in dollars is _______________

$982,000 - $932,200 = $49,800

a company sells 500 sleds per month for $80. variable costs are $41 per unit and fixed expenses are $3,500 per month. the company thinks that using a new material would increase sales by 70 units per month. if the new material increases variable costs by $4 per unit, the impact on net income would be a _______________

((570 x $35) - $3,500) - ((500 x $39) - $3,500) = $450 increase

a company sold 750 units with a contribution margin of $120 per unit. if the company has a break-even point of 450 units, the net operating income is _______________

(750 - 450) x $120 = $36,000

lance, inc. has sales of 9,000 units. the contribution margin per unit is $32 and fixed costs total $120,000. lance's profit is _______________

(9,000 x $32) - $120,000 = $168,000

if sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by ______________

20%

daisy's dolls sold 30,000 dolls this year for $40 each. each doll's variable cost was $19. if daisy incurred $250,000 of fixed expenses, net operating income for the year is _______________

30,000 x ($40 - $19) - $250,000 = $380,000

marjorie's mugs sold 300 mugs last yearner $20 each. variable costs were $7 per mug and total fixed costs were $1,700. marjorie's mugs' profit was _______________

300 x ($20 - $7) - $1,700 = $2,200

tommy's trains is currently selling 55,000 toy trains for $50 per unit. the variable cost per train is $26 and total fixed costs are $110,000. if tommy sells an additional 5,000 trains, profits will _______________

5,000 x ($50 - $26) = $120,000 increase

if a company has a variable expense ratio of 35%, its cm ration must be ______________

65%

to calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the _______________

contribution margin per unit

which of the following are assumptions of cost-volume-profit analysis: - fixed costs per unit stay the same within relevant range - costs are linear and can be accurately divided into variable and fixed elements - in multi product companies, the sales mix is constant - variable costs per unit increase over the relevant range of activity

costs are linear and can be accurately divided into variable and fixed elements; in multi product companies, the sales mix is constant

the break-even point calculation is affected by _______________

costs per unit, sales mix, selling price per unit

bruin corporations pays its salesperson a flat salary of $5,750 per month and is considering paying her $30 per unit instead. current unit sales are 250 per month, but bruin believes the compensation change will increase unit sales by 50%. bruin's current contribution margin is $100 per unit. if bruin switches the compensation and sales grow as expected, net operating income will _____________ per month

current income: ($100 x 250) - $5,750 = $19,250 salary change: ($100 - $30) x 250 x 150% = $26,250 - $19,250 = $7,000 increase

when a company produces and sells multiple products _______________

each product most likely has a unique contribution margin, each product most likely creates a unique total of fixed costs, a change in the sales mix will most likely change the break-even point

estimating the fixed and variable components of a mixed cost using the ______________ approach involves a detailed analysis of what cost behavior should be

engineering

a company has reached its break-even point when the contribution margin _______________ fixed expenses

equals

true or false: account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation

false

a measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating _______________

leverage

whenever a straight-line is a reasonable approximately for the relation between cost and activity, _______________ cost behavior exists

linear

the amount by which sales can drop before losses are incurred is the _______________ of _______________

margin; safety

chrissy's cupcakes has $832,000 in sales and $265,000 in fixed expenses. given a contribution margin ratio of 72%, chrissy's profit (loss) is _______________

profit = cm ration x sales - fixed expenses = 72% x $832,000 - $265,000 = $334,040

water world sells wake boards and water skis and pays sales commissions based on product sales prices. the wake boards sell for a higher price than the skis and the skis have a higher contribution margin per unit than the wake boards. which of the following are true: - the company should not pay sales commissions on these products - salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them - sales commissions based on sales price would be ideal to use under these circumstances - the company would rather see more skis sold as it creates the higher profit per unit for the company

salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them; the company would rather see more skis sold as it creates the higher profit per unit for the company

to simplify cvp calculations, it is assumed that _______________ will remain constant

selling price

pete's putters sells each putter for $125. the variable cost is $60 per putter and fixed costs total $400,000. based on this information _______________

the sale of 12,000 putters results in net operating income of $380,000; the contribution margin per putter is $65

a company is currently selling 10,000 units of product for $40 per unit. the unit contribution margin is $27. the company believes that spending $50,000 on advertising will increase sales by 750 units per month and increase the selling price to $45 per unit. if this change is implemented, profits will _______________

((10,750 x $32) - (10,000 x $27)) - $50,000 = $24,000 *selling price increase raises contribution margin*

the term "cost structure" refers to the relative proportion of _______________ and ______________ costs in an organization

fixed; variable

which statements are true: - plotting data on a scattergraph is an important diagnostic step - when plotting a scattergraph, cost is the independent variable - scattergraphs should be used after high-low or regression analysis is performed - scattergraphs are a way to diagnose cost behavior

plotting data on a scattergraph is an important diagnostic step; scattergraphs are a way to diagnose cost behavior

the vertical distance between the total revenue line and the total expense line on a cvp graph represents the total _______________

profit or loss

to convert margin of safety in dollars to the margin of safety in terms of the number of units sold, divide the margin of safety in dollars by the ______________

sales price per unit

terry's trees has reached its break-even point and has a contribution margin ratio of 70%. for each $1 increase in sales _______________

total contribution margin will increase by $0.70; net operating income will increase by $0.70

candle central has $1,440 of total variable expense for a sales level of 600 units and $2,160 of total variable expense for a sales level of 900 units. if candle central sells 500 units _______________

total variable cost is $1,200; the variable cost per unit is $2.40

when using excel, the intercept, slope, and R^2 is determined by selecting any data point in the scattergraph plot and selecting add ______________

trendline

true of false: when using the high-low method, fixed costs are calculated after variable costs are determined

true

true or false: when using the high-low method, fixed costs are calculated after variable costs are determined

true

golden corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying him $20 per unit instead. sales are currently 200 units per month. golden believes the compensation change will increase unit sales by 50%. the current contribution margin is $80 per unit. if the change is implemented, net operating income will _______________

current income: ($80 x 200) - $5,000 = $11,000 new salary: ($80 - $20) x 200 x 150% = $18,000 - $11,000 = $7,000 increase

a change in sales mix _______________

from low-margin to high-margin items may cause total profits to increase despite a decrease in total sales; from high-margin to low-margin items may cause total profits to decrease despite an increase in total sales

high-low or least squares regression analysis should only be done if a _______________ plot depicts linear cost behavior

scattergraph